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The sectors bound to outperform this earnings cycle

As the earnings parade gets underway this week, expectations are low. As low as they were during the depths of the financial crisis.

But that doesn't mean markets will tumble too.


Using Kensho, a tool designed to quantify historical market events, we looked at how stocks have performed before and after the kickoff of corporate reporting seasons since 2013 — marked by Alcoa's release of its quarterly earnings.

Ahead of actual reports, earnings estimates almost always decline — often falling far enough that companies beat them. The markets tend to follow suit: dropping when the bar is set ever lower, and then climbing when reports over deliver.


Jose Luis Pelaez | MNPhotoStudios | Getty Images

In the four weeks leading up to the start of earnings season, the S&P 500 has traded negative about half the time and returns 0.1 percent on average. But in the four weeks after the start, the index is a much better long bet — it has traded positive 70 percent of the time and returned 1.5 percent on average.

The technology and industrial sectors have followed this pattern closest. They typically trade lower leading up to earnings season, and then outperform after reports begin rolling out.


There are a few exceptions. Utilities and telecommunications — traditionally defensive sectors for investors — tend to climb ahead of earnings as investors may look for safer trades amid low expectations. They also move higher with the broader markets as reports get underway. Over the eight weeks before and after Alcoa reports, they've been the best performers by far.

So as corporate America is expected to continue its earnings recession, the results — and market performance — may not be as bad as they first seemed.

Disclosure: NBC Universal, the parent company of CNBC, is a minority investor in Kensho.